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Sunday, May 3, 2009

How Much Financial Help for Adult Children?

I have posted now and again on my plans to hand my now 18 and 20 year old children (in smallish pieces, over about 5 years) the money we had saved for their college education. This is because they chose no-cost options. I have not really received any comments on this plan, though I would welcome some. Good idea? Bad?

The other day, I mentioned in a comment on Funny About Money's blog (see Blogroll to the right for a link to her fabulous blog), that, as my wants are kind of low at the moment, I plan to help my children out later when they want to buy houses. Funny's response: SDXB reflects that middle-class children never grow up: we continue to nurture them psychologically and financially in perpetuity.

SDXB (aka Semi-Demi-Ex-Boyfriend, for those who are not FAM aficionados) is echoing the advice of Thomas Stanley and William Danko, authors of The Millionaire Next Door. They call the giving of money to adult children "economic outpatient care," and note that, generally, parents who do this "weaken the weak." Children who receive EOC are (relative to their peers) low-producers. I have certainly seen this weakening effect among people of my acquaintance.

Of course I LOVE The Millionaire Next Door. I remember reading it for the first time, seeing a question along the lines of What are the three characteristics of millionaires? I turned the page to see this: FRUGAL FRUGAL FRUGAL. I was so happy, especially since this was in the big-spending 90s, when the laws of saving and frugality didn't seem to apply.

So on one side there are Stanley and Danko, whose arguments are backed up by research. And I do despise the sense of entitlement of many (most?) of my peers and their children.

But here's the other side. I keep feeling that kids now are--sometimes because of the example set by parents--starting out behind. I read an article stating that students have NEVER graduated with the amount of education debt common today. In days of yore, parents who could afford it gave children a head-start--with a dowry, a piece of land, a goat.

Now people enter adult life with mounds of debt that will take years and years to pay off. Remember: college financial aid officers and the media have been declaring for years that "education debt is GOOD debt." Is this really "good"? And the lending has been "privatized," with our government guaranteeing the loans for the private lenders. And the lending has rules so complex that I cannot understand them, like the one that says that you can only consolidate or refinance your loans once, no matter how much interest rates may go down.

I'm getting out of my element here, so I had better stop. But here's my question: does all financial help weaken the recipient? Are kids starting out "behind" compared to how they started out in a perhaps mythical past? Help!!


Duchesse said...

Frugal, Do you have a specific purpose for the money you are thinking of giving over the next five years? (Rhetorical question.)

If it is to help them achieve a very specific goal (start a business, buy property, travel) I am in agreement; if it is a rationalization along the lines of "Because they 'chose low-cost options', I should give them the money, it's just sitting there", I urge you to ponder the giving urge.

A child does not 'deserve' the balance of the parent's savings because she was talented and hardworking enough to get scholarships.

If your children graduate debt free, how are they "starting out behind"?

Or are you a bit uncomfortable because you and they know that fund is sitting there, and you are not spending it?

My approach: retain unused educational savings till a need arises that we can help with- HELP, not fully fund. I want my sons to go to a grocery store and figure out how to stretch a modest budget; to live in a Goodwill-furnished "first apartment" (instead of Mom and Dad paying their rent and buying furniture) so they get a sense of responsible money management.

And no matter how frugal the parent is, the kids just have to figure out for themselves if they'd rather buy a shirt or a couple of pints at the pub this week.

If we died today, our sons would not inherit before they reach age 35. As my lawyer said, "What would YOU have done with this kind of money at 21"? (Yeah, baby!)

My parents paid for my education and said, "We are equipping you to make your life".

Though they could have afforded it, they did not give me large chunks of money till I was at least 45; they lent it (for projects like building a house), at significantly below bank rates. A typical Christmas gift was the credit of of a few months' loan payment. No money in the pocket but out of debt faster.

(They had experience with the effects of wealth handed out without concurrent responsibility.)

My advice: If giving significant cash gifts, give for something specific they need or will enjoy; consider in some cases a contribution rather than fully funding (e.g. a car),and do not get self-guilted into thinking "we saved for the kids and so we must give it to them."

They seem like wonderful young people, intelligent and alive. I am willing to "bet on it": with your example, they will handle money well.

FB @ said...

If you have taught them well, they will carry on those principles...

With that being said, I am of the generation that graduated with $60k in debt, and I had to learn the hard way to clear it in 18 months. But, I would not have changed that experience for the world.

I really took charge of my money, understood what worked, what didn't (I also LOVED The Millionaire Next Door), and was a bit worried hearing about those kids that are financially crippled because they rely on their parents.

For me, I think I've come up with a rough plan of what I'd like to do with my money for my kids.

#1: Fully fund retirement. No questions asked. This comes first.

#2: Don't pay for kids' education or only pay for 50% or just tuition, but have the money saved. If they graduate with a lot of loans, but have proven to be good students, good kids, and have a plan in place to pay it off, I'd consider clearing the entire amount to start them debt free.

Or, give them a year with that debt to let them understand how it feels instead of just clearing it willy nilly.

I want my kids to learn how to manage their money while in debt, how to be frugal and just to understand that things in life aren't given to them on a silver platter.

I'd also gift equally to each child, no matter the amount of loans. If I have $60,000 and 3 kids, each child gets $20k, no matter what they ended up with loans at the end.

I don't like financial favouritism just because one child needs it more (in your opinion) or one graduated with more debt. It just isn't fair.

Duchesse said...

Am mulling over FB's reference to "financial favouritism". I can certainly understand the potential for resentment if one child is given far more money.

It's important to treat each child fairly, and for parents to be open about the criteria for financial help. And "fair" is not necessarily "equal".

If, for example, Jill has slogged through medical school plus a long residency and Jack has graduated from a 2-year community college program, I would provide more help for Jill who has more debt and has contributed more "sweat equity", and be open about why.

Frugal Scholar said...

@Duchesse and FB: Wow! I am honored by your thoughtful and lengthy responses. I wrote about this issue once more and hope to get some more feedback from readers. And these are not vast sums that I'm talking about. Mr. FS and I are teachers. And this is not right away--this is for the 5-10 years AFTER college. Thanks to you both again.

Funny about Money said...

Hmmm... My sense about what you and Duchesse say in this post is that it depends on how responsible the adult child is about money. If you know the kid is going to diddle it away, you might think twice about forking over cash, at least until the person is older or has some specific goal that the money will be used for. On the other hand, it could be argued that a gift is a gift, and one has no business dictating how it will be used.

SDXB's current daughter-in-need is wildly profligate. She simply cannot learn to handle money, or, for that matter, much else in her life. Once again she's at his doorstep begging for money to fend off the proverbial wolf. He has decided that, despite some bad luck that isn't quite her fault (except that she got into the predicament that led to the present fiasco because of prior bad decisions), he should not give her any more cash. He reasons that she needs to hit bottom and get herself out of it before she will pull her life together and start behaving less foolishly. That remains to be seen. But whether he's right or not, clearly continuing to underwrite a 40-some woman's escapades is throwing good money after bad.

IMHO, the only way middle-class adults in our generation can help the next generation stay in the generation is by passing capital to them: social, intellectual, and financial capital. We give them social capital by teaching them how to function in our culture; intellectual capital by educating them as well as we can manage; and financial capital both through that education and by passing money to them. So, in that view we not only may give them money, we have a duty to do so.

Agreed, that young people start out with financial disadvantages that those of us who were children of the middle class 30 or more years ago did not have to contend with. The outrageous rip-off that is student lending is one of them. Back in the dark ages, college tuition cost nothing like what it does today. And a generation ago a bachelor's or master's degree--in any subject-- would suffice to launch you into a decent lifestyle; today a B.A.'s value is roughly equivalent to our high-school diploma's. The cost of housing is absurd: even at deflated prices, a house is unaffordable for most young people, particularly given that they now compete for wages against sub-subminimum-wage workers overseas. Ditto the cost of a car, a ridiculously expensive necessity in all but two or three U.S. cities. Health care is likewise unaffordable for many young men and women.

We can only hope that the crash of the economy will lead to a new order in which our financial lives return to some degree of sanity. I don't hold out much hope for that; I suspect what we'll see is the wholesale Third-Worldization of America. In that case, we may keep our kids' generation more or less in what remains of the middle class by passing our assets to them, but after that generation...well. There will be no middle class for them to stay in.

Suzy said...

I think if you've already told them you would give them the money then you're kind of stuck honoring your word. My parents wanted us to go to college(younger brother and myself) and saved for that purpose. I went to junior college with a scholarship for 3 semesters(stupid me dropped a course and was short a credit)and after 1 year at Texas A&M I had a summer internship that paid for most of the fourth year. They paid for a 5th year(took me a while!)and I had a part-time job on campuse for spending money. I was spoiled(I know this now). My brother on the other hand just couldn't seem to stay interested. I think it's because he started working a good job with the state when he was 16 or 17 during the summer and got used to having money which went well having a girlfriend. Anyways, my dad told him to make up his mind if he was going to college or not because he wasn't going to pay for the same classes twice - he chose the job and girlfriend thinking he'd get the college money but my dad said no. The money had been earmarked for college and nothing else. Later before they retired they opened Roth IRAs for us(actually we opened them but they funded them) with the understanding it was a headstart towards our retirement. They did this for about6 or 7 years. I think right out of college is young to have a lot of money - my parents were good with saving but I know I wasn't. I wasn't bad but just not good at it. It sounds like your kids have a better understanding of saving though.